Chapter 4 Financial Planning Exercise 7 If you put $3,000 in a savings account t

Question

Chapter 4 Financial Planning Exercise 7 If you put $3,000 in a savings account that pays interest at the rate of 5 percent, compounded annually, a. how much will you have in 3 years? Round the answer to the nearest cent. Round FV-factor to three decimal places or use the Appendix B. (Hint: Use the future value formula.) b. how much interest will you earn during the 3 years? Round the answer to the nearest cent. c. If you put $3,000 at the end of each year into a savings account that pays interest at the rate of 5 percent a year, how much would you have after 3 years? Use the Appendix B Round the answer to the nearest cent. Round FV-factor to three decimal places.

Explanation / Answer

a) We have

Future value = Present value *(1+rate per period)^no. of periods

= 3000 * (1.05)^3

= 3000*1.158

= 3474.00

b)

Interest Earned = Future Value - Present Value

= 3474 -3000

= 474.00

c) We have

Future value of Annuity = A [((1+r)n-1) / r]

Where

A - Annuity payment =3000

r - rate per period = 5%

n - no. of periods = 3

Future value of Annuity = 3000 [((1+.05)3-1) / .05]

= 3000*3.152

=9456.00

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